5 Steps to Investing in Tropical Real Estate Now (Retire there later)

Are you tired of seeing your retirement funds under perform? Ever lie awake at night wondering how you're going to afford to retire comfortably?

More importantly, are you starting to wonder if "comfortable" is all you'll ever attain and that your fantasies of retiring to the tropics may only be a pipe dream?

What if I told you that using your retirement account to buy and maintain property in the tropics is not only perfectly legal, but it's also one of the best long-term investment options out there. It also has the added benefit of providing you with a ready-made place to retire once you're able.

How many mutual funds can say that?

Here's how you can put your retirement worries to rest (and replace them with tropical daydreams) in 5 simple steps.

1. Meet the self-directed IRA.

Like most Americans, you probably have much of your retirement savings held in an Individual Retirement Account that's managed by a custodian and invested in a variety of stocks, bonds, and mutual funds. And it's probably been fairly stagnant, possibly only earning enough to cover the fees associated with the account. Traditional IRAs are fairly safe, hassle-free, cookie cutter, invest-it-and-forget-it options that are best suited for folks who don't have the time or knowledge to take control of their own investment decisions.

Self-directed IRAs work essentially the same as their traditional counterparts. However, the biggest difference is that the custodian or trustee is merely responsible for holding and distributing the assets as well as filing a few forms with the IRS. Everything else (i.e. the decisions of where to invest the funds) is left up to you. With a self-directed IRA, you hold the checkbook. 

2. Now calm down, take a deep breath, and listen to all your options.

Yeah, it sounds a little scary and unconventional. But that's the beauty of it. By investing with a self-directed IRA you have the freedom to choose investments that you never even knew were possible (much less legal). Think land, business enterprises, gold, offshore investments, and the option I think is the perfect fit for a long-term retirement investment: real estate. More specifically, real estate south of the border.

Real estate is still on the rebound from the global economic crisis, and there are even better deals to be found in Central and South America. Many North Americans are taking advantage of these great investment options and buying land or houses to use as rental property, or even just to sit on for a while and let it appreciate on its own due to the improving infrastructure and development in the area.

When you consider all of the possibilities, managing your own retirement funds in a self-directed IRA will really start to sound like a lot of fun! It's also an extremely manageable risk. You'll need to become familiar with the tax ramifications and rules that apply to your particular type of IRA (e.g. Simple, Roth, SEP).

You'll also need to find an administrator who can handle your self-directed IRA. (Note: It won't be the typical brokerage firms you're accustomed to hearing about, but there are firms who offer this service.) Before choosing one, you'll want to make sure they have experience with the specific type of investments you plan to make, like real estate or small business.

3. Choose your investment.

This is where it gets really good. Rather than reading a snippet about Options A, B, and C before checking a box on your annual IRA review form, you get to research and explore whatever investment possibilities you want! If that's tropical real estate, you even get to hop on a plane and pretend you're on House Hunters International as you scout out the perfect property to serve as your investment. 

Many future expats choose raw land. Some go with a stand-alone beach cottage or even a big city condo. Your decision should take into consideration factors like how soon you plan to retire, how much upkeep you're willing to handle, and of course your preference in tropical settings.

The process of scouting out an investment property is another one that can be made much easier with a little homework and, more importantly, the help of some trusted professionals with experience in these types of transactions. You'll want to solicit the services of a local attorney in the area where you plan to buy, as well as a Realtorwho can help you navigate the buying process.

Don't overthink it or try to save money by handling everything yourself. In matters of international land purchases, you should take every precaution to avoid getting ripped off, scammed, or worse. Get referrals and references and trust your team to handle the tough stuff.

4. Sit back and wait patiently.

As you might have guessed, tax laws prevent you from receiving any benefits from your investment until you reach the appropriate age to begin receiving distributions from your account. (In the other words, all profits and income associated with the property have to be reinvested into the IRA.) In the meantime, you have a lot of options for what to do with your property.

If it's raw land, you can literally do nothing. If you've purchased property in an area with great potential that's just starting to emerge and develop, you'll benefit simply from the value added by what's going on around it. Over the years, you'll get the thrill of watching things change. The government will build more roads, install utilities, and make other betterments that will in turn draw more investors, residents, and eventually tourists to the area. With the influx of people comes even more development and commerce, and the cycle continues.

If you choose rental property, you can hire a property manager to handle the day-to-day issues that arise. This is important since even something as simple as buying light bulbs with money from your own pocket is a no-no for an investment property held in an IRA. The only other thing you'll want to do is start planning how you'll spend your time once you're able to move down and enjoy the property for yourself.

5. Pack your bags and come on down.

Once you've reached the age of retirement and are eligible to begin taking distributions from your account, then the only thing left to do is make the move. At that point you can take advantage of your very own tropical paradise that has been paid for with tax-deferred (or even tax-free) retirement dollars and has also generated additional income or appreciation to add to your years of savings. 

In addition to the financial security, you also get to enjoy other benefits like a spectacular climate and lower cost of living. It's the perfect long-term retirement investment choice for someone with the right amount of patience who's willing to think outside of the big box brokerage firm's limited options. Do you have what it takes?

Oh, yeah, there's also an unofficial 6th step to this process. And that's--whatever you do--please consult a tax professional at every step along the way to make sure you understand all the potential ramifications of what you're doing, BEFORE you do it. Rules are always subject to change, so what's legal today might not be tomorrow. Like I said, the hassles and risks are manageable, but make sure you're proactive to prevent your dream retirement from turning into a nightmare.